Bank Behavior in Regional Finance and the Development of Regional Industries:The Case of Prewar Fukushima, Japan

Because of the unstable financial market after World War I, the Japanese financial system experienced a wave of bank mergers, which resulted in an increase in bank scale and the development of branch banking. In this paper, we explored the implications of the expansion of branch banking, using bank-office-level data for Fukushima Prefecture. We found that branch offices that belonged to banks headquartered in other cities, counties, or prefectures tended to have a lower propensity to loan compared with the offices of banks headquartered in the same cities and counties as the offices. We also find that concentration of deposits on bank offices headquartered in other cities, counties, or prefectures had a substantial negative impact on the development of the weaving industry. The structural change in the banking industry after World War I altered the spatial allocation of funds and thereby affected the development of regional industries.